Finally, I have uploaded my first tutorial describing how to build terrain from heightmap image.
Software used in this tutorial: UnrealEd, Terragen 0.9, World Machine, Photoshop, 3ds max, and converters (Undying T3D Tool, ASE2T3D).

Subject:

It does look cool but, like any heightmap technique, has inherent limitations in that you can only really create a rolling landscape with it (not jagged canyons with overhangs and rock bridges, Unreal-style).

Subject:

Hellscrag wrote:It does look cool but, like any heightmap technique, has inherent limitations in that you can only really create a rolling landscape with it (not jagged canyons with overhangs and rock bridges, Unreal-style).

Yes, this is the only major flaw with heightmaps. However, in Unreal, you can add geometry with tessellated cubes or something similar to get hanging cliff sides.